Portfolio choices and VaR constraint with a defaultable asset

Emilio Barucci and Andrea Cosso

Quantitative Finance, 2015, vol. 15, issue 5, 853-864

Abstract: We consider a Constant Elasticity of Variance (CEV) model for the asset price of a defaultable asset showing the so-called leverage effect (high volatility when the asset price is low). We show that a VaR constraint re-evaluated over time induces an agent more risk averse than a logarithmic utility to take more risk than in the unconstrained setting.

Date: 2015
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DOI: 10.1080/14697688.2013.871643

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